Welcome to the Era of Ever-Increasing Deficits

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The Congressional Budget Office’s (CBO) flagship budget and economic report will be released next Monday, but the agency issued a short summary Tuesday to whet our appetites. The summary report presents a picture of the budget outlook that is not substantively different from its prior report. CBO previously forecast a small reprieve in the first few years of the forecast before returning to rapidly increasing deficits.

The current forecast projects no such reprieve in the near term but echoes the dismal forecast in later years. The reason for the minor adjustment is that recently passed legislation, including the transportation bill (the FAST Act), the 2016 appropriations bill, and the extension, and permanent enactment of, multiple expired tax provisions.

As a result of the last minute legislative push, the government deficit is expected to increase to $544 billion or 2.9% of GDP in 2016 from $439 billion in 2015 (2.5% of GDP). Over the next 10 years the deficit is expected to increase every year and will surpass $1.3 trillion in 2026 (4.9% of GDP).

What accounts for the massive increase in the deficit? According to CBO, rising budget deficits are almost entirely accounted for by growth in outlays rather than a shortfall on the revenue side. Revenues are projected to remain stable over the forecast horizon, ranging from 17.9% of GDP to 18.3%, consistent with their historical average.

Outlays rise from 20.7% in 2015 to 23.1% in 2026, well above historical averages. Among the three components of government outlays, net interest and mandatory spending account for most of this increase. Discretionary spending only rises from $1.2 trillion to $1.4 trillion over the forecast horizon. As a share of GDP discretionary spending is projected to decline from 6.5% in 2015 to only 5.0% in 2026.

CBO expects a substantial increase in net interest spending, resulting from rising interest rates and a growing debt burden. Net interest costs are projected to soar from $223 billion (1.3% of GDP) in 2015 to $830 billion (3.0% of GDP) in 2026. Mandatory outlays are also projected to grow rapidly, rising from $2.3 trillion in 2015 (12.9% of GDP) to $4.1 trillion in 2026 (15% of GDP).

Rising deficits are projected to drive up the debt. The debt held by the public is projected to grow more than 80%, from $13.1 trillion in 2015 to $23.8 trillion in 2025. As a share of GDP the debt would rise from 73.6% in 2015 to 86.1% in 2026.

The summary report from CBO underscores the structural challenges that continue to face the budget outlook. In the long-run our debt is unsustainable and, in the absence of reform, will constrain the future actions of policymakers, result in slower economic growth, lead to increased spending on interest costs, and heighten the risk of a fiscal crisis.

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